What comes to mind and doesn't leave before I have time to write about it...

When blue chips become cow chips

My friends at Stocktwits have been doing an incredible job building a community of thoughtful, active, spirited investors who congregate online each day to exchange ideas. What's great about Stocktwits [well, one of the many great things], is that it's a true meritocracy. The conversation is organic and people's acumen is judged in real time. But it doesn't matter if you come to the site as an enterprising college student or a bored house wife or a professional trader. If you've got good ideas and are willing to share them, you will flourish. If you are closed minded or unwilling to share your perspectives, you will quickly be forgotten.

Howard, Soren and Philare working hard to keep Stocktwits from being consumed by the trappings of scale. As new members flock in, the signal to noise ratio can become hard to manage and one of the ways they're doing this is by keeping a tight lid on speculative penny stocks. No pink sheet or bulletin board companies are on the system, which automatically gives them a leg up from many of the other stock-related communities out there.

But last week an interesting conversation evolved from Howard's worry that stocks trading below $5 should be excluded from the system. Historically, I could understand the merits of that viewpoint. After all, many institutional funds have long been unable to invest in sub-$5 stocks for fear of liquidity and market manipulation.

So while Howard's premise was predicated on sound historical empiricism, it unfortunately was impractical in today's historically damaged market.

Why? Because as I type this 44 of the 500 constituents in the S&P 500 are trading below the $5 threshold.

AIG

American Int'l. Group

$0.42

ETFC

E*Trade Financial Corp.

$0.80

ODP

Office Depot

$1.05

THC

Tenet Healthcare Corp.

$1.11

GNW

Genworth Financial Inc.

$1.21

DYN

Dynegy Inc.

$1.30

ACAS

American Capital, Ltd.

$1.35

HBAN

Huntington Bancshares

$1.46

C

Citigroup Inc.

$1.50

F

Ford Motor

$2.00

FITB

Fifth Third Bancorp

$2.11

AMD

Advanced Micro Devices

$2.18

GM

General Motors

$2.25

CIT

CIT Group

$2.45

JNY

Jones Apparel Group

$2.69

MBI

MBIA Inc.

$2.74

JDSU

JDS Uniphase Corp.

$2.76

CBG

CB Richard Ellis Group

$2.89

LSI

LSI Corporation

$2.90

DDR

Developers Diversified Rlty

$2.95

NOVL

Novell Inc.

$3.16

EK

Eastman Kodak

$3.19

MU

Micron Technology

$3.22

GCI

Gannett Co.

$3.24

S

Sprint Nextel Corp.

$3.29

XL

XL Capital

$3.31

Q

Qwest Communications Int

$3.39

RF

Regions Financial Corp.

$3.42

MOT

Motorola Inc.

$3.52

WYN

Wyndham Worldwide

$3.69

HST

Host Hotels & Resorts

$3.70

TLAB

Tellabs, Inc.

$3.80

IPG

Interpublic Group

$3.81

BAC

Bank of America Corp.

$3.95

MTW

Manitowoc Co.

$4.10

NYT

New York Times Cl. A

$4.13

TER

Teradyne Inc.

$4.13

JBL

Jabil Circuit

$4.14

CBS

CBS Corp.

$4.27

JNS

Janus Capital Group

$4.41

GT

Goodyear Tire & Rubber

$4.44

MI

Marshall & Ilsley Corp.

$4.58

SLM

SLM Corporation

$4.60

JAVA

Sun Microsystems

$4.68

Source: Standard & Poors

When 9% of the de facto blue chip equity index are below a given threshold, you have to throw out a lot of the rules we used to hold as truths.

But this is just one arbitrary measure of many that hints at the degree of market degradation we're experiencing. Remember, it wasn't long ago that a company had to maintain a market capitalization of more than $5 billion to be included in the S&P 500. Then it was lowered to $4 billion. And then it was lowered again to $3 billion in December.

Why do I bring this up? Because as I type this, I calculate 139 S&P 500 stocks that are BELOW the $3 billion market capitalization threshold. Tough times continue. When we can't even maintain listing requirements for more than a few MONTHS, how can we possibly and credibly argue that any metric like "trough earnings" on said index are relevant to finding a bottom?

Disclaimer:
At the time of writing, the author or firms affiliated with the author maintained a long position in SDS, as well as long positions in several underlying constituents of the S&P 500. The author and
the firm reserve the right to alter their investment positions at any
time in the future. The
content on this site is provided as general
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Comments

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My guess is that the S&P committee is scratching its collective head over representativeness issues. What should the index look like when/if things return to normal?

Once they figure out the composition, it shouldn't take them too long to reselect larger replacement candidates, subject to liquidity issues. Trivia note: Is the largest financial in the US markets too illiquid to be included, i.e., Berkshire Hathaway?